(Switching Gears) William Tessar: Investor Loans–Where the Smart Originator Will Be When Rates Go Up

William J. Tessar is the President and CEO of Civic Financial Services, Redondo Beach, Calif., an institutional private money lender for real estate investment financing. He has more than 30 years of experience in the financial services industry and has been one of the nation’s top loan originators. Learn more about CIVIC at www.civicfs.com.

(This is the final installment in a four-part series, “Switching Gears,” examining how four executives–Paul Anselmo of Evolve Mortgage Services; Michael Franco of SitusAMC; Nate Johnson of SLK Global Solutions; and Bill Tessar of CIVIC–plan to transition employees from loan production to mortgage servicing once the refinance boom ends and forbearance cases need to be solved.)

Few originators are starving for business today, and if they are, they’re in the wrong industry. Thanks to unbelievably low rates over the past several years, millions of borrowers have been able to refinance their mortgages at least once and often multiple times. It’s been happening for so long, it almost feels normal, as though the party will never end. 

With the benchmark 30-year fixed rate beginning to creep higher, however, we may start to face a new reality. That’s why smart originators are already thinking about how to generate business when the refi dust settles. And many are setting their sights on the real estate investor channel, because the opportunities for business growth are incredible.

The Gift that Keeps Giving

Most originators have no idea how many real estate investors are within their reach. Based on my work with originators and my own experience as a top-producing originator, I know that 15 to 20 percent of an originators’ contacts are actively investing in residential properties or considering it. In fact, real estate agents are also often investors, which makes them a great source for future referral business.

Serving real estate investors is the gift that keeps on giving. The typical investor buys two to three homes per year. If they’re fixing and flipping homes, the buyers of those properties will need financing, too. And if the investor keeps the property, they typically transition from bridge financing to a conventional loan, which means even more business for the originator.

When you add it all up, a typical investor can bring in four to six loans to an originator in one year. There isn’t a single homeowner who will refinance their loan that many times in one year. To serve real estate investors, however, you need more tools at your disposal than conventional or government loans—especially in a hot market where speed to close, rules. This is why originators are looking to private money loans to thrive in a post-refi environment.

Faster and Easier

While private money lending continues to grow, not many originators understand these loans, let alone see them as a lucrative option. It’s true that private money loans are different from conventional or government financing. By nature, they’re easier and faster, plus the learning curve is not as steep as originators may think.

Because investment properties are “Business Purpose Loans” (BPLs), they are non-owner occupied. Therefore, consumer regulations such as TRID and Dodd-Frank do not apply. Private money loans are not based on income or creditworthiness of the borrower either. It’s based on the value of the property. If a client brings in equity in a property, there’s a very high likelihood they are going to be able to close that loan. An investor can leverage as high as 80 percent LTV for an investment property, and even finance up to 100 percent of rehab and construction costs. 

All of these factors make private money loans much faster to sell. Consider the fact that the typical conventional loan takes approximately 40 days to close. If you’re really good at it, you can reduce that to possibly 21 days. With private money, you can typically less than two weeks; even as little as 5 days.

Going About it the Right Way

With the right private lending partner, serving investors becomes even easier. But not all private lenders are the same. For originators, choosing the wrong private lender to work with can be disastrous to their reputation.

There are a few things to consider when evaluating private lenders, and at the very top of the list is stability. The events of the past year have made this crystal clear. Private money lending was growing fast before March 2020, but when the pandemic hit, three quarters of all private lenders paused operations or went out of business entirely. As loan values on the secondary market collapsed, many lenders simply lacked the liquidity or financial wherewithal to survive.

Every private lender also should have the borrower’s best interest at heart. An experienced lender can spot bad deals very quickly. By working with an originator and the investor, they can analyze the investor’s budget, the transaction details and the investor’s exit strategy to determine whether the deal truly makes sense.

Most experienced private money lenders provide one-on-one training to borrowers to make sure they don’t get out over their skis, as we say. They also typically have a team of experienced valuation experts and construction and rehab experts on hand as well. At the end of the day, it’s in a private lender’s best interest to ensure investors don’t end up in a bad position.

Lastly—although it should go without saying—originators shouldn’t work with a private money lender that also competes with them for conventional business. Whether the investor chooses to refinance the loan or sell it, the originator will want that business. True success in the origination market is all about creating customers for life and being in the passenger seat with them not just some of the time, but every time.

Start Sharpening Your Tools

Imagine the purchase market conventional and government loans is a lake. When rates rise, all the originators who poured their efforts into refi’s and didn’t plan ahead will be casting their rods into that once-isolated lake. Instead of 10 people fishing, you’re going to suddenly have 500 people, all fighting for the same bass. Lines will get crossed and frustrations will rise, and many will not be able to catch enough to sustain themselves, let alone thrive.

Experienced brokers and originators have seen it coming. Even while managing their refi business, they never stopped nurturing new channels, clients and prospects. They made sure they would be an originator for all borrowers and kept all the tools in their toolbox sharpened and ready to go. Those tools include nurturing real estate investors and partnering with an experienced private money lender that can help their clients reach their financial goals.

The bottom line: refi booms are great for business and every originator should go after them as long as they can. But refi’s are also feast or famine. Right now, most originators have full bellies and aren’t looking for their next meal. Smart originators know what they’re going to eat next. And by serving investors, they’re not likely to go hungry.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)